Business Law

Will Divorce Impact My Business?

Divorce and business. Ownership of a business can be a never-ending and all-consuming endeavor. In many cases, the dedication and passion for it can cause strains in your personal life, leading to a troubled marriage and eventual divorce. Consult a divorce attorney if you own a business and are going through a divorce.

Will My Business Be Lost in a Divorce?

When a person facing divorce is the sole owner or co-owner of a business, the question of whether the company will be forced to liquidate arises. In most instances, the answer is “no.”

However, the court will evaluate the value of your business as part of the divorce’s financial analysis.

All income and assets acquired by either spouse during the marriage are considered marital property. It comprises savings, property, stocks, bonds, debts, and business ventures. Additionally, marital property includes compensation from the business in the form of savings. In addition, the courts divide equitably any investments and retirement savings accumulated through the date of separation.

The income of the owner’s spouse determines future child and spousal support obligations.

Caution: If your business’s value is based on excess earnings, you could argue that your non-owner spouse cannot double-dip. For instance, if the non-owner receives the value of the additional earnings as equitable distribution, you should exclude that amount from the supportable income. A competent attorney for business divorce should be aware of this potential concern.

What is the Legal Meaning of Marital Property Regarding Divorce and Business?

Since business and divorce focus on the distribution of marital property, let’s examine what constitutes marital property.

The business is considered marital property if it was founded during the marriage. Even if your spouse does not own a portion of your business, this is still true. Therefore, your spouse shares a stake in the company and has a claim against it.

Even if the business is yours, your spouse may be entitled to a portion of the company’s value growth during the marriage. Generally, it is advisable to consult with a business divorce attorney to obtain a business valuation.

Consider the following factors when determining whether or not your business is a marital asset or an individual asset:

  • When you formed the business
  • Amount of time between business formation and your marriage
  • The success of the business before and after your marriage
  • Your spouse’s involvement in business formation
  • Your spouse’s contribution to business operations or growth
  • Changes in business valuation over time

Nine states recognize community property for marital assets. Therefore, each spouse will receive an equal share.

In other states, including Pennsylvania, the courts determine what each spouse receives using equitable distribution. You can learn more about it here. Consequently, you will likely need a business valuation to support your divorce case.

Four Exceptions to Marital Property

As mentioned above, a variety of factors determine marital property. However, there are four exceptions:

  1. Gifts, Bequests, and Inheritances

    Any gifts, bequests, or inheritance one party receives from a third party, kept in a separate title, are not considered marital assets and are valued as of receipt. However, the increase in value is considered marital property.

  2. Property Acquired Pre-Marriage

    Marital property doesn’t cover assets owned before the marriage, kept in a separate title. Again, however, the increase in value during the marriage is.

  3. Property Acquired Post-Separation

    Any asset acquired after separation with non-marital funds is not marital property.

  4. Property Protected by a Prenuptial Agreement

    A well-drafted prenuptial agreement protects all assets acquired before and sometimes during a marriage. So, you’ll want to consult with a family lawyer near you.

Following a divorce filing, the business must be valued if it is identified as a marital asset or as having a marital component. The non-owner spouse has the right to know whether the business is marketable, possesses significant assets, and generates excess income for the owner.

In certain instances, however, the success of a business depends almost entirely on the proprietor’s reputation. As a result, it may have limited distribution value. In most cases, the courts want the business to survive the divorce as an asset of the owner’s spouse, especially if the family has relied on the business to generate income.

Business Value Regulations in Divorce Cases

Frequently, a divorcing couple disagrees about the company’s value, prompting a business appraiser to define the standard of value before conducting an appraisal. The value standard provides a set of hypothetical conditions for determining the value.

There are three primary methods for determining this value:

  1. Assets: In this approach, assets minus liabilities equals value. Assets include physical assets like inventory, equipment, and real estate. Intangible assets cover intellectual property, accounts receivables, etc.
  2. Market Value: Similar to a real estate valuation, appraisers value the business based on comparable companies sold.
  3. Income: The most common valuation method uses business history and various formulas to predict cash flows and profits for a business.

It is essential to note that these standards may produce significantly different values. If your business model is straightforward, it may be simpler to determine a fair price. Other situations, however, necessitate the services of a business appraiser.

Consult your business divorce attorney for guidance on a particular value standard. They can examine past cases within a jurisdiction to identify disallowed procedures or determinations. And that could be of great benefit to you.

Other Considerations Regarding Your Business and Divorce

Typically, courts seek to limit business damage. Therefore, they frequently accommodate a buyout of the non-owners economic interest in the company over time not to place the business owner in a financial bind.

If your spouse is an employee of the company but not an owner, you should be wary of them actively harming the business. For instance, a spouse who calls customers or misbehaves at the workplace may be attempting to retaliate against you for personal reasons.

These actions may hurt the asset’s value and future income source. Terminating is an option if your spouse engages in such conduct while on the job.

Protecting Your Business from a Divorce

Although it isn’t something you want to consider, 50 percent of marriages end in divorce. So, you should protect your business to survive a divorce. It’s best to talk with an attorney near you to consider your options.

Here are some steps you can take:

  1. Marital Agreement

    An agreement, whether pre- or post-nuptial, allows you to designate your business or future companies as separate from the marriage. Although courts sometimes fail to uphold marital contracts, they protect your business in the event of a divorce.

  2. Buy-Sell Agreement

    This agreement controls when owners can sell their interest, who can buy it, and the price paid. It comes into play when an owner retires, goes bankrupt, becomes disabled, gets divorced, or dies. In short, a buy-sell agreement is a sort of prenuptial agreement.

  3. Shareholder Agreement

    A shareholder agreement can define guidelines in the event of a divorce. For example, it can determine the mechanisms for valuing each spouse’s interest in the company, assign business ownership with a divorce, and restrict ownership transfer.

  4. Business Structure

    In conjunction with a shareholder agreement, structuring the business as a partnership or limited liability company (LLC) can protect you from a divorce and your business.

  5. Employment

    Don’t allow your spouse to work for or with you. As a married couple, it may seem like a good idea. But, it can lead to issues during a divorce.

  6. Trust

    In a trust, it owns the business, so your business doesn’t count as a marital asset.

Another critical protection is remembering to pay yourself a salary versus investing cash flow into the business. Doing so prevents your spouse from claiming you deprived them of money during the marriage.

Consult With Business Divorce Attorney

The dissolution of a marriage is stressful enough, but the possibility of losing one’s livelihood can be frightening. In addition, divorce litigation can hinder your ability to maintain the same work pace.

Immediately consult a business divorce attorney if you are facing a divorce. They can advise you on the best ways to maintain your business with minimal disruption. In addition to divorce attorneys, our firm can assist you with real estate issues and marriage contracts. We have law offices in Bucks and Montgomery counties in Pennsylvania.

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